On the Stability of Group Formation: Managing the Conflict Within

This paper develops a positive analysis of stable group formation, highlighting the role of conflict management within groups. The analysis builds on a simple economic model that features a “winner-take-all†contest for control of some resource. When a group forms, members pool their efforts in that contest and, if successful, apply the resource to a joint production process. While reducing the severity of conflict over the contestable resource relative to the case of individual conflict, the formation of groups adds another layer of conflict, that is, one between the members of the winning group over the distribution of their joint product. The effectiveness of conflict management in enabling groups to resolve this second layer of conflict in more “peaceful†ways has some important implications for the equilibrium structure of groups as well as for the allocation of resources.